The Amazon Effect: Part 1 | Impact on National Landing’s Office Market

By now, everyone’s heard Amazon’s announcement for their new headquarters’ locations. News seems to be breaking swiftly as details surface and time tables are released. Now it’s commercial real estate’s turn to start analyzing how Amazon’s decision will impact the markets. In this series, Colliers will explore the effects we anticipate Amazon to have on the D.C. Metropolitan market.

While the entire Metropolitan D.C. region is poised to benefit from Amazon’s HQ2, no other area of the market will be impacted like National Landing.

Where is National Landing?

National Landing is a geographic area in Northern Virginia branded specifically to outline the region Arlington County and Alexandra City submitted to Amazon for HQ2. It includes the current Crystal City and Pentagon City submarkets as well as the Potomac Yard neighborhood of the Old Town submarket. Because of the natural connection between Crystal and Pentagon Cities, the submarkets are typically clustered together for analysis purposes. Given the inclusion of Potomac Yard in Amazon’s plans, geographic boundaries need to be redrawn to support a clear understanding of market conditions.

Immediate Impact on National Landing

In a recent press release, JBG SMITH announced that Amazon has proposed to lease an estimated 500,000 square feet of existing space in what is now National Landing. The length and commencement dates for these leases have not been revealed. The 500,000 square feet will be split between three buildings: 241 18th Street South, 1800 South Bell Street and 1770 Crystal Drive. These buildings are located on the east side of Route 1 and will house the initial wave of employees hired by the tech and retail giant. Announcements have been made that 1800 South Bell Street will be modernized, and that the renovation of 1770 Crystal Drive will commence during the fourth quarter of 2018.

The proposed plans also have Amazon purchasing PenPlace along with the land at Met 6, 7 and 8. These development sites have a potential density of 4.1 million square feet. JBG SMITH will be retained as the development partner, property manager and retail leasing agent, who also announced that planning for the first building will occur this year with construction to begin in 2019.

Additionally, as part of the incentive package offered to Amazon, the Commonwealth of Virginia in conjunction with Virginia Tech announced that a $1 billion Innovation Campus will be built in the Potomac Yard region of National Landing. The intent of the investment is to ensure the availability of a growing pool of workers possessing technical and innovative expertise. The campus will bring together hundreds of new graduate students, dozens of faculty members and numerous industry partners. Virginia Tech has already entered a memorandum of understanding with Stonebridge Associates and the City of Alexandria to construct the campus on Blackstone Group’s land at Swann Road. The campus will include 300,000 square feet of academic space, research and development facilities, 250,000 square feet of partner space dedicated to startups and corporate facilities, 350,000 square feet of student and faculty housing and 100,000 square feet of retail. This expansion will triple the university’s footprint in Northern Virginia.

Market Implications for National Landing

Amazon’s promise to generate 25,000 jobs in the region will result in a significant increase in demand for office space and alter the real estate investment fundamentals in this market. It is reported that Amazon will start occupying space in 2019, hiring only 400 people. In both 2027 and 2028, it is anticipated that the pace of employment will accelerate to 3,000 jobs annually. Assuming that Amazon remains in the buildings initially leased, it will occupy 4.6 million square feet or nearly 36% of National Landing’s current inventory.

As in Seattle, the new Amazon headquarters will attract other companies that want to be near the eRetailer. While these companies can occupy space in several other locations around the region, a number will move into the National Landing submarket. It is possible that the market will witness 1.6 to 3.2 million square feet of additional demand in the next 15 years. Combining Amazon and companies that follow the eRetailer, a total of 5.8 to 7.0 million square feet of new demand is anticipated in National Landing. Amazon’s growth in the Seattle region often exceeded expectations. This phenomenon is likely to occur in the Washington, D.C. region as well. As a result, Colliers’ growth assumptions may be understated.

Demand related to Amazon and firms electing to locate their offices near Amazon will outstrip the amount of space currently available in National Landing. In addition to the 4.1 million square feet of space to be built for Amazon, 250,000 square feet of Virginia Tech’s Innovation Campus will be dedicated to “partner facilities and corporate space.” However, in the absence of significant additional development, downward pressure on vacancy rates is likely, thereby impacting rents. Presently, asking rental rates average $37.08 per square foot. If rents grow at half the pace experienced over time in Seattle, National Landing rental rates would grow 17% in five years and 37% in 10 years. That said, the timing and scale of future development is an important variable in this equation. There are several land sites in both Crystal City and Potomac Yard that could be developed to meet demand. Moreover, it is likely that some of the existing 1960’s era, mid-rise buildings may be demolished to make way for new, high-rise office towers.

Amazon’s decision to locate offices in the Washington, D.C. region will transform the real estate market in multiple ways, impacting citizens, workers, tenants, owners and investors. As more specific information is released by Amazon, Arlington County and the Commonwealth of Virginia, the breadth of change related to Amazon’s decision will become clearer.

“The impact of Amazon is already being felt. Landlords are more confident in the demand profile of Arlington County than they have been in years. Much like the federal government, although on a smaller scale, Amazon is a large consumer of office space and a driver of additional demand. This rising confidence has already emboldened some landlords to increase asking rates and to withdraw from active federal procurements.”Charles Dilks, Executive Vice President | Government Solutions | Colliers International

The pace of change and increase in rents will affect a number of existing industries. Stay tuned for the next issue of The Amazon Effect, when Colliers explores this issue.

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About the author

Rob is Director of Research for Colliers International in the Greater Washington, D.C. area, where he oversees research operations and reports on leasing and investment markets. He was Americas Researcher of the Year for 2015.